THE HIGH COURT OF DELHI AT NEW DELHI
% Judgment delivered on: 29.01.2013
+ ITA No.1286/2008
KHANNA AND ANNADHANAM .......Appellant
versus
COMMISSIONER OF INCOME TAX .......Respondent
Advocates who appeared in this case:
For the Appellant : Mr Ajay Vohra, Ms Kavita Jha and Mr Somnath
Shukla, Advocates.
For the Respondent : Mr Sanjeev Sabharwal, Sr. Standing Counsel with Mr
Puneet Gupta, Jr Standing Counsel.
CORAM:-
HON'BLE MR JUSTICE BADAR DURREZ AHMED
HON'BLE MR JUSTICE R.V.EASWAR
JUDGMENT
R.V.EASWAR, J
1. This is an appeal filed by the assessee under section 260A of the
Income Tax Act, 1961. On 08.09.2010, the appeal was admitted and the
following substantial question of law was framed for decision: -
"Whether the amount of `1,15,70,000/- received by the
appellant from DTTI in terms of release agreement with
DTTI is capital receipt or revenue receipt?"
2. The assessee is a firm of chartered accountants. From the year
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1983, under an informal understanding it was getting referred work from
M/s Gupta Chaudhary & Ghose, Chartered Accounts of Calcutta who
were doing the work in Calcutta which was referred to them by Deliotte
Haskins & Sells (,,DHS), a firm of chartered accounts based outside
India. The understanding between the assessee-firm and the chartered
accountants firm in Calcutta was limited to the work in Delhi and
surrounding areas only. It may also be added that DHS was part of the
chartered accountants firm by name "Deliotte Touche Tohmatsu
International", based in USA. The informal understanding between the
assessee and DHS was formalised on 14.08.1992 by an agreement
between them. In 1996, it transpired that DHS wanted another firm of
chartered accountants by name C.C. Chokshi & Co., of Bombay to
represent its work in India. Accordingly an agreement was entered into
on 14.11.1996 which was called a release agreement, under which the
assessee firm was to no longer represent DHS in India; thereafter DHS
would not refer any work to the assessee-firm. In consideration of the
termination of the services of the assessee-firm, a compensation of US$
325000 amounting to Indian `1,15,70,000/- was paid by DHS to the
assessee-firm. This amount was received in the previous year relevant to
ITA No.1286 /2008 Page 2 of 9
the assessment year 1997-98 and the short question before us is whether
the receipt was capital in nature or was professional income.
3. The assessing officer took the view that the receipt was taxable as
part of the professional income of the assessee-firm; his decision was
reversed by the CIT (Appeals) and on further appeal by the revenue, the
Tribunal agreed with the assessing officer. Hence, the present appeal by
the assessee.
4. The contention put forward on behalf of the assessee is that the
amount represents compensation for the sterilisation of a source of
income, namely referred work from DHS through the Calcutta firm of
chartered accountants and where an amount is received for loss of a
source of income it would represent capital receipt. It was contended that
the amount did not represent professional income. It is emphasised that
for 13 years (1983-1996) the assessee-firm was carrying out the referred
work which was quite lucrative and the arrangement with DHS through
the Calcutta firm constituted the source and once that source got
terminated, the compensation received can only be capital in nature.
5. We think that there is a good deal of force in the contention of the
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assessee. In Kettlewell Bullen & Co. Ltd. v. CIT: (1964) 53 ITR 261 the
Supreme court drew a distinction between the compensation received for
injury to trading operations arising from breach of contract or from the
exercise of sovereign rights and compensation received as solatium for
loss of office. It was held that the compensation received for loss of an
asset of enduring value would be regarded as capital. After a review of
the entire case law on the subject, it was ultimately held as follows: -
"On an analysis of these cases which fall on two sides of the
dividing line, a satisfactory measure of consistency in
principle is disclosed. Where on a consideration of the
circumstances, payment is made to compensate a person for
cancellation of a contract which does not affect the trading
structure of his business, nor deprive him of what in
substance is his source of income, termination of the
contract being a normal incident of the business, and such
cancellation leaves him free to carry on his trade (freed
from the contract terminated) the receipt is revenue : Where
by the cancellation of an agency the trading structure of the
assessee is impaired, or such cancellation results in loss of
what may be regarded as the source of the assessee's
income, the payment made to compensate for cancellation of
the agency agreement is normally a capital receipt.
In the present case, on a review of all the circumstances, we
have no doubt that what the assessee was paid was to
compensate him for loss of a capital asset. It matters little
whether the assessee did continue after the determination of
its agency with the Fort William Jute Co. Ltd. to conduct the
remaining agencies. The transaction was not in the nature
of a trading transaction, but was one in which the assessee
parted with an asset of an enduring value. We are,
ITA No.1286 /2008 Page 4 of 9
therefore, unable to agree with the High Court that the
amount received by the appellant was in the nature of a
revenue receipt."
6. The ratio of the above judgment applies to the present case. The
Tribunal seems to have been troubled by the fact that despite the
termination arrangement with DHS the assessee did not cease to carry on
the profession. This aspect of the matter has also been answered by the
Supreme Court in the above judgment and it has been held that the fact
that the assessee continued its business or its usual operations even after
termination of the agencies was of no consequence. What appears to be
the ratio of the judgment is that if the receipt represents compensation for
the loss of a source of income, it would be capital and it matters little that
the assessee continues to be in receipt of income from its other similar
operations.
7. We may refer to one more judgment of the Supreme Court which is
reported as Oberoi Hotel Pvt. Ltd. v. CIT: (1999) 236 ITR 903. There
the assessee was operating, managing and administering several hotels
across the globe such as Cairo, Colombo, Kathmandu, Singapore, etc. Its
agreement with Hotel Oberoi Imperial, Singapore, which it was operating
ITA No.1286 /2008 Page 5 of 9
from 02.11.1970 was terminated and the assessee received a sum of
`29,47,500/- from the receiver of the Singapore Hotel. The Supreme
Court held that the amount was received because the assessee had given
up its right to purchase or operate the property and thus it was a loss of a
source of income. The receipt was accordingly held to be capital in
nature. It was observed, after a review of the earlier cases, that ordinarily
compensation for loss of office or agency is to be regarded as a capital
receipt and the only exception where the payment received for
termination of an agency agreement could be treated as revenue was
where the agency was one of many which the assessee held and its
termination did not impair the profit-making structure of the assessee, but
was within the framework of the business, it being a necessary incident of
the business that existing agencies may be terminated and fresh agencies
may be taken. It is somewhat difficult to conceive of a professional firm
of chartered accountants entering into such arrangements with
international firms of chartered accountants, as the assessee in the present
case had done, with the same frequency and regularity with which
companies carrying on business take agencies, simultaneously running
the risk of such agencies being terminated with the strong possibility of
ITA No.1286 /2008 Page 6 of 9
fresh agencies being taken. In a firm of chartered accountants there could
be separate sources of professional income such as tax work, audit work,
certification work, opinion work as also referred work. Under the
arrangement with DHS there was a regular inflow of referred work from
DHS through the Calcutta firm in respect of clients based in Delhi and
nearby areas. There is no evidence that the assessee-firm had entered into
similar arrangements with other international firms of chartered
accountants. The arrangement with DHS was in vogue for a fairly long
period of time -13 years- and had acquired a kind of permanency as a
source of income. When that source was unexpectedly terminated, it
amounted to the impairment of the profit-making structure or apparatus of
the assessee-firm. It is for that loss of the source of income that the
compensation was calculated and paid to the assessee. The compensation
was thus a substitute for the source. In our opinion, the Tribunal was
wrong in treating the receipt as being revenue in nature.
8. On behalf of the revenue our attention was drawn to another
judgment of the Supreme Court in CIT v. Best & Co. (P) Ltd.: (1966) 60
ITR 11. This judgment was rendered by the same bench which had
earlier rendered the judgment in Kettlewell Bullen & Co. Ltd. (supra).
ITA No.1286 /2008 Page 7 of 9
The decision was however in favour of the revenue. The earlier judgment
in Kettlewell Bullen & Co. Ltd. (supra) was referred to in the judgment
but the Supreme Court observed that the application of the principle laid
down in Kettlewell Bullen & Co. Ltd. (supra) must depend on the facts of
each case. Their Lordships distinguished the facts and held that in the
case of Best & Co. (supra) the assessee had innumerable agencies in
different lines and it only gave up one of them and continued to do
business without any apparent mishap and that the correspondence
showed that the assessee gave up the agency without any protest
"presumably because such termination of agencies was part of the normal
course of its business". It was on account of this distinction that the
ultimate decision went in favour of the revenue. The facts of the case
before us, as noted earlier, are not in pari materia with those in Best &
Co. (P) Ltd. (supra). In our view the facts are more akin to the case of
Kettlewell Bullen & Co. Ltd. (supra) and, therefore, the ratio laid down
in that case is more appropriate to be applied to the present case.
9. In the result we answer the substantial question of law by holding
that the amount of `1,15,70,000/- received by the assessee in terms of the
release agreement dated 14.11.1996 represents a capital receipt, not
ITA No.1286 /2008 Page 8 of 9
assessable to income tax. The appeal of the assessee is allowed with no
order as to costs.
R.V.EASWAR, J
BADAR DURREZ AHMED, J
JANUARY 29, 2013
hs
ITA No.1286 /2008 Page 9 of 9